Fitch Ratings said it assigned Nigeria-based Sterling Bank Plc (Sterling) a Long-Term Issuer Default Rating (IDR) of ‘B-‘ and a National Long-Term Rating of ‘BBB-(nga)’.
The Outlook is Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS AND VR Sterling’s IDRs are driven by its standalone creditworthiness as defined by its Viability Rating (VR). The VR is constrained by challenging operating conditions in Nigeria, the bank’s modest franchise and developing business model, weaknesses in its financial profile, and its higher risk appetite than peers.
These factors are counterbalanced by Sterling’s coherent strategy, especially its business transformation initiatives, and strong management team. Sterling’s financial profile is characterised by high credit concentrations, variable earnings and profitability, modest capital buffers based on its risk profile, and its structurally weak funding and liquidity profile. Sterling has a high exposure to the oil and gas sector, representing 45% of gross loans at end-9M17, mainly to mid-sized corporates. Around 38% of the bank’s loans at end-9M17 were in foreign currency, exposing it to currency volatility. Sterling’s impaired loans ratio (based on IFRS) increased to 3.5% at end-9M17 from 1.7% at end-2016, arising mainly from the troubled oil and gas sector. Based on prudential requirements (all loans that are 90 days overdue), Sterling’s NPL ratio was 6.1% at end-9M17.
While both its impaired loans ratio and NPL ratio are below sector averages, we believe Sterling’s asset quality remains highly sensitive to loan concentrations by industry and obligor. There is inherent instability in Sterling’s funding base. 40% of the bank’s customer deposits are from corporates, which, in our view, are price-sensitive and less stable. These deposits are also predominately short-term, exposing the bank to significant structural asset-liability maturity mismatches. Additionally, the deposit base is highly concentrated. Sterling is addressing funding and liquidity risks by raising market funding, demonstrating good access to borrowed funds and debt securities issuance. Positively, we also note that the bank has successfully attracted more stable retail deposits, including strong growth in ‘non-interest-bearing’ deposits (albeit from a low base).
With the rollout of the new strategy and franchise development, we expect any structural weaknesses in the customer deposit base to be resolved over time. We believe the bank’s capital buffers are low (Fitch Core Capital Ratio of 13.2% at end-9M17), particularly due to its sensitivity to concentration risks. Sterling reported a Basel II total capital adequacy ratio of 11.4% at end-9M17, a modest buffer against its regulatory minimum of 10%. In addition to higher retained earnings and by repositioning its balance sheet, the bank is expected to raise subordinated debt in the domestic market (which counts towards Tier 2 regulatory capital) to improve capital buffers.
In the medium term, we expect Sterling’s prospects to improve as the franchise strengthens with the expansion of its retail/SME and ‘non-interest-bearing’ lines and business reorganisation. SUPPORT RATING AND SUPPORT RATING FLOOR Similar to other Nigerian banks, Sterling’s Support Rating (SR) of ‘5’ and Support Rating Floor (SRF) of ‘No Floor’ reflect our view that sovereign support is possible but cannot be relied upon.
Fitch believes the authorities retain willingness to support the banking system, but their ability to do so particularly in foreign currency is weak due to Nigeria’s relatively modest foreign-currency buffers. In addition, we have limited confidence that any available resources will be used to support the banks rather than to execute other priority policy objectives.